Being back on the hunt for rehab and wholesale deals reminds me all over again how vital it is for investors to be able to estimate and run the numbers on a deal quickly to determine the highest, best offer while keeping within reasonable profit margins. I recently saw this at work on two lots in Acton AARE now has under agreement. After getting a tip from a colleague, I drove by the properties, ran my quick and dirty estimate and submitted an offer, which was accepted. Great news! Though no one was more shocked than I was, since the offer was substantially lower than what we knew the sellers wanted — I think showing them a breakdown of all our costs helped them understand why we were offering what we were. Take that tip with you, if it helps on YOUR next offer.

Then I met with my contractors for an inspection and to complete a more detailed rehab estimate — and we were FINALLY able to get in to the second house, which was locked up before.

Long story short, this is when we discovered we hadn’t budgeted nearly enough for the rehab costs. The new house had asbestos and structural issues we didn’t count on. Since our offer was contingent on access to the second house and “confirming construction estimates,” I was able to adjust my offer to reflect these new costs and and re-submitted it. After some negotiation back and forth, it was approved.

It’s great to have some new deals in the pipeline AND it’s even better to have them at the right price that places us in the best possible position to successfully rehab or wholesale the properties and make money for our company and our private lenders. Jumping at a deal that’s over-priced or at a price that doesn’t account for all of the potential rehab costs is one of the most common mistakes I see among new investors. This post reviews both the quick and dirty rehab estimate checklist as well as a detailed estimate, and it’s as relevant today as it was when I first posted it.

Investors, don’t be afraid to submit an offer that may seem appallingly low. In fact, if the seller isn’t insulted by my offer, then I figure it isn’t low enough! Just kidding — kinda. To provide some context, when we were in full acquisitions mode two months ago, I submitted 28 offers in a month’s time and had 2 accepted, which is just about right (Actually, that’s a higher success rate than normal!). Keep in mind, getting the property under contract isn’t a “win” for you if the price you paid doesn’t leave you enough room to make the needed updates and repairs, price it to sell and still turn a profit. So be patient, and stick to your numbers. Refer to these previous posts to learn how to analyze deals to keep you safe, once you have your rehab costs to include in the formula.

We here at AA Real Estate Group have been busy all summer preparing rehabbed properties for sale, closing on completed rehabs and wholesale deals, and prepping new rentals for tenants. And now that I’ve got those plates all spinning, I turned my attention to the pipeline of new deals, to discover it was…..almost empty. Seriously?!? What gives?
Between this discovery and the updates being posted by my colleague Shaun M. Reilly, what’s been bubbling up for me is that Massachusetts real estate is currently in a bubble — there, I said it!

I can hear you now, “Wait, Nick — how can you say such a thing? Sales are strong, demand is high and prices are on the rise! Right?” Well, let’s take a look.

The first red flag for me came from a recent WSJ article that addressed a practice that seems to be back in play that we haven’t seen since 2006 – SELLER-FUNDED DOWN PAYMENTS for buyers who can’t afford their down payments. This, coupled with the return of stated income and NINA (no income, no assets) loans for borrowers… I don’t know about you, but I find this return to sub-prime lending disturbing.

And that safety measure the Feds created by requiring appraisal companies to be hired by third parties to reduce the likelihood they will be influenced to turn in artificially inflated appraisals?? Well, I have it on good authority from a number of friends in the appraisal industry, that not only are they completely swamped and backlogged, but when they do get to a property, they are being pressured by their bosses (who want to keep Bank X as a client) to turn in an appraisal within a certain target value.

So, let me get this straight — people are once again getting sub-prime loans on properties whose values are being artificially inflated? Yup, that’s right.

And finally, that brings me back to my pipeline. It would be easy to assume it’s because I have been super busy managing projects, and therefore less busy following up on leads, breaking into meth labs, or analyzing properties — and that’s not the case. In fact, I’ve been out to look at piles of properties and what I’m finding is the numbers just don’t work — the sellers are eager to cash in on a hot market and won’t negotiate a wholesale price that meets the AARE criteria for minimum profit, and you know what? There’s usually someone right behind me willing to pay the inflated price (with more money than brains!), and so far, they’re usually STILL making money, due to how property values and asking prices are rising so quickly with sellers competing for homes, but how long can that model be sustained?

Based on this article from boston.com, not for long — many communities have seen a sharp rise in properties with reduced sales prices (over 21% overall) and anywhere from 13 to 20 percent of deals are falling through before they close, based on an analysis of monthly pending sales numbers put out by the Massachusetts Association of Realtors. Zachary Christman, a Hammond Residential Real Estate broker working the Newton/Brookline market quoted in the article shares that buyers “are worried they are paying too much, there is all this stuff they have to do with the house—it just scares them. There is no doubt about it. The buyers, when they realize they are paying five or six figures over asking, it just makes everything else that much more scary.”

Breaking down the numbers, as a real estate redevelopment firm we used to strive to make 15-20% on a transaction, as a percentage of our resale price. This was in the DOWN market when it was easier to find deals and bargains, but resale prices were lower. Now, with the hot market, we’ve had to reduce our margins to the 10-15% range. The scary part is — think about it — not if, but when the market begins its correction, and with only a 5% market swing — that HALVES our profit. I don’t know about you, but I don’t want to be holding 10 projects at once when the prices start to fall!

What do you think? Are you seeing signs of a real estate market correction? Or have you seen any problem properties with issues? Be it divorce, estate sale, probate, fire damaged, failed septics, foundation issues, Medicaid, short sale, underwater, foreclosure, owe more than your home is worth, or you know you simply can’t make the repairs needed — gimme a call! I pay wholesale and marketing fees!

Next week, myself and the team will be starting our goal setting process, where we take a few days off to FOCUS (you’ll see that more below) on really analyzing the year prior, and figuring out where we want the ship to move as we head into 2015.

“Looking Back” is the first step in our Goal Setting as we review this past year, and determine:

1. Did we achieve what we set out to do?

This is the time to pull out your goals sheet from last year, and being very honest with yourself. What did you get done? What items did you miss on? Ensure you look at ALL the goals you set – business, personal, & spiritual ones. These were the ones that were measurable, and not just some pie in the sky wish list you had.

(Tip: The good doobies have been pulling this out monthly and ensuring they’re on track on a month to month basis!)

2. If not – Why not?

This isn’t the time for excuses. This is the time for you, as a business owner or self employed individual, to consciously think of the other factors that caused you to not meet one or more of your goals. It rarely is caused by an outside factor that could not be helped… and no, “the economy” is never a good reason.

Was your Action Plan solid enough? Did you hold yourself accountable on a regular basis? Did all your marketing go out? Was your budget adhered to? What other factors caused you to go over budget / over time / not get things done on your action plan? Do you still procrastinate (note – we all do!!)? Was your goal even reachable, or just a dream?

Remember – a Goal is just a Dream with an Plan… and I add to this, by saying

A Goal is just a Dream without a Focused Plan of Action.

The word “FOCUS” is not thought of much. I’ve found in the real estate business, and even just a self employed person, you get pulled in a million different directions, have too much information (both needless and important) thrown at you, and have to both market for new customers & follow through on your promises…not to mention the crapload of other responsibilities. It gets VERY easy to fall by the wayside and be working IN your business, rather than ON it. That’s my soapbox moment for this article.

The above is really only the first and second steps in your Goal Setting for next year… which are NOT RESOLUTIONS. As we say every year, since 90% of resolutions are not kept, it can be as simple as changing the label, and more importantly, changing the process. Sometimes wording can make all the difference in how you look at things.

For your complete Goal Setting guide that we refer to each year ourselves – take a look here:

If you’re new in the business, you are probably nervous about your first seller phone call, and eventually your first seller visit. Hopefully this post clarifies what your goals are on each.

Before talking to you, I wasn’t sure about the effectiveness of the direct mail. You convinced me to continue the process.

Today one owner called me. I suggested to meet with them next week. Where would you suggest we meet them since I don’t have a dedicated office? What should I discuss when I meet with them? Do I need to bring my lawyer with me? How does the process work?

~ Hong

Hi Hong,

GOOD WORK on getting a call to come in – you probably guessed by now you should meet them at the property, or if they refuse, a Panera Bread or Starbucks is good – but you’re eliminating the whole point, which is to see the property and go through what’s needed in the rehab, and to verify their motivation level (reason for selling).

I usually tell my students the point of the phone call is to:
1. Build rapport
2. Why are they selling / assess motivation (and what problem do you need to solve?)
3. Collect Info on the property
4. Set an appointment to view (if motivation is high enough)

Once at the appointment, your new goals:
1. Build rapport
2. Gather project & site data (scope of work, rehab needed, pictures)
3. Re-assess Motivation, figure out your best solution & exit strategy (not necessarily the same thing!)
4. Either make offer (rare), tell them you’ll have an offer for them in 24-48 hours, or plan for follow up if they aren’t motivated enough.

Hope this helps!!! If you’re brand new, I’d suggest checking out our blog for free info, and to stay active on BiggerPockets.com, Black Diamond, CREOnline.com, and to KEEP NETWORKING!

About AARE Group

We are a real estate acquisition, sales and management company dedicated to helping homeowners solve problems and seeing hidden value while serving investors and leaving neighborhoods better than we found them, since 2005. We do this by buying, selling, and managing single-family and multi-family homes — 150 redevelopment deals and over 50 rental units in New England, Pennsylvania and Florida.